I have just read Martin Pring’s chapter on outside bars in Martin Pring on Price Patterns and I thought I’d have a look through my charts to try and find this pattern; it didn’t take long. The idea is if the high and low of a bar exceed the previous bar’s high AND low, then we have an outside bar. What we want for a break lower is to see the bar closing in the lower third of the bar, and vice versa for a break higher. Even better is for the close of the outside bar to below the low or close of yesterday’s bar.
Outside bar, lower close example
On the S&P 500 futures (ES) a nice outside bar at daily resistance formed. Martin also mentioned that these short patterns should be used with confluence with other things so that the weight of the evidence indicates the market direction. Remember that these patterns are lower probability when considered on their own. Have a look at the ES Daily chart ending on 24-May-2010.
ES Outside bar, lower close
Confluence
Looking at the monthly chart, we are at the 61.8 retracement where price will likely hit some resistance. This level also happens to be support from July 2008 and looks to be resistance now in April 2010.
ES Monthly May 2010
Taking the daily chart short from 1182 from 30th April with a stop above the high of that bar gives us a nice setup. This is all in hindsight of course, but I find it interesting that a setup with confluence delivered the results.
